Thursday, August 16, 2007

Foreclosure mess: Telegraphed in advance

This story on the Wall Street Journal continues the by-far familiar tale now of ARMs and subprime loans and foreclosures. I was curious about foreclosures in the US in the years before the current housing boom/bust cycle and picked a year at random - 1995. When I searched on Google for "foreclosures 1995", the top result is this 2005 paper:
Since the early 1990s, there has been a very large growth in mortgages made by so-called subprime lenders, which specialize in lending to borrowers with credit history problems. One reason for concern about this trend is that it has been associated with a large and simultaneous rise in foreclosures, which can entail significant costs not just for those directly affected but also for surrounding neighborhoodsand larger communities. This study usesmultivariate estimations to quantify the impact of subprime lending on neighborhood foreclosure levels. After controlling for neighborhood demographics and economic conditions, the authors find that subprime loans lead to foreclosures at far greater rates than do prime loans. Moreover, subprime lending appears to account for a substantial share of foreclosure activity in high-foreclosure neighborhoods.

In other words, this problem has been seen before and was a ticking time-bomb, if one cared to pay attention.

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